Global Equity Strategy - Prefer equities to corporate credit ::Credit Suisse,

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● Equities are up 8% since the middle of August, yet credit spreads
have widened slightly. We believe that equities will outperform
high-yield credit in Europe in particular (with the important caveat
that investment grade spreads in the US seem to be overdiscounting
a recession).
● Valuation: Equity's earnings yield still looks attractive relative to
both investment-grade and high-yield corporate bond yields in the
US and Europe (even based on trend earnings). ISM and credit
spreads are consistent with an equity risk premium (ERP) of
6.2%, compared with the current 7.2%.
● Stocks: We flag vulnerable stocks as those whose equity has
outperformed despite their CDS spreads widening by more than
average. Then there are stocks that have underperformed despite
their CDS rising by less than average. We also highlight stocks
that are likely to underperform if the European high-yield spreads
rise, as we think they will, and those that tend to outperform when
the European high-yield spreads rise.

Prefer equities to corporate credit
Equities are up 8% since the middle of August, yet credit spreads
have widened slightly. We believe that equities will outperform high
yield credit in Europe in particular (with the important caveat that
investment grade spreads in the US seem to be over-discounting a
recession).
Valuations: Equities still look cheap relative to credit
Equity’s earnings yield still looks attractive relative to both investmentgrade
and high-yield corporate bond yields in the US and Europe
(even based on trend earnings). ISM and credit spreads are
consistent with an equity risk premium (ERP) of 6.2%, compared with
the current 7.2%.
Economic indicators suggest spreads should be wider
Correlation with lead indicators suggests high-yield spreads should
have widened by more. Default rates implied by high-yield spreads, at
6% on a 12-month trailing basis, look moderate in comparison to the
historic recession default levels of 10%+ (this suggests to us that
European high-yield spreads are likely to move higher, as we think a
Euro-area recession is likely).
Catch-up: The recent relative widening in spreads has only brought
US high-yield spreads back in line with equities (after the decoupling
during 2009/10). There is a similar, though less extreme, story in
Europe.
Turning point: At the market trough, equities have led credit on 5 out
of 7 occasions.

Investment grade is a play on government bonds
Investment grade credit is effectively a play on government bond
yields—yet, yields are hovering at 240-year lows while we believe that
eventually the central banks will print money in the developed world
and equities are an inflation hedge until inflation rises above 4%. Releveraging:
we think with net debt to EBITDA at a 20-year low (in US)
and FCF close to record highs, corporates will re-leverage modestly
via buybacks for investment grade.
Stocks
We flag vulnerable stocks as those whose equity has outperformed
despite their CDS spreads widening by more than average (Banco
Sabadell, Standard Chartered, IP). Stocks that have underperformed
despite their CDS rising by less than average include Vivendi, Allianz,
Smiths, Siemens. Stocks that are likely to underperform if European
high-yield spreads rise, as we think they will, include Air France and
Fraport. Stocks that tend to outperform when European high-yield
spreads rise include Imperial, Novartis and KPN.